Monday, January 07, 2008

Death and the Big Mack attack

Happy New Year folks! I am back in action, all I have is a very light cough. This week is going to be insanely busy blog wise.

Teri Karush Rogers has written an excellent article on the emotional trauma of an estate sale. Dealing with the death of a loved one is extremely painful as is the amount of sensitivity associated with selling a deceased family member’s home.

“People don’t maintain a high state of emotions for months on end,” said Thayer Cheatham Willis, a clinical social worker in Lake Oswego, Ore., and the author of “Navigating the Dark Side of Wealth: A Life Guide for Inheritors.” Family dynamics can be recast for the better if heirs “grow up and realize that they can’t have everything they want,” Ms. Willis said. “That maturation step is when you accept the compromise and accept it with grace — and you see a future that you like. You can definitely come out of it as an improved family.”

As this article has demonstrated, this is a process that takes more time than usual due to family issues and money. That is probably why the passage of time is something that needs to happen in order for the heirs to get their bearings straight.

One passage that really grabbed my attention was the story about two sisters who decided to part ways with their parents’ real estate investments.

Georgea Kapassakis and her sister, Evelyn Capassakis (their father changed the spelling of the family name when Evelyn was born), inherited a trust that included the family home in Bay Ridge, Brooklyn; a vacation home on Long Island; and a number of rental properties. It took the sisters 15 years to finally dispose of everything, with the exception of the Bay Ridge house, which Ms. Kapassakis now owns.“I felt I was still young at the time and it was too soon not to have any parents; it was too soon for my mother to go,” said Ms. Kapassakis, a speech-language pathologist who was in her early 30s at the time and had 3-year-old twins. “And she helped with baby-sitting, so I had to change my job. Many changes had to take place, and worrying about what was going to happen to the houses was too stressful.”Her sister, a tax principal and estate-planning adviser at PricewaterhouseCoopers Private Company Services, agreed: “We were pretty much frozen by the inability to undo what my father had put together. He believed firmly in real estate as an investment.” The pair often found themselves at loggerheads over how to manage the property and whose turn it was to pay for what. “There were times that tensions were pretty high,” Ms. Kapassakis said. “There were many properties, and each one was a headache. We couldn’t handle it personally because we each had our own careers and our husbands had their own jobs. I don’t think we managed it correctly.”Eventually, the continual stress forced them to part with their parents’ legacy.

I truly believe in real estate as an investment vehicle, however there are certain rules you need to follow in order to be profitable. One rule is that real estate is maintenance intensive. Since you are dealing with a physical product, it needs to be properly managed. Even if you are buying into a REIT, there needs to someone hired to take out the garbage the tenants produce and to collect the rent.

What these sisters actually inherited was another set of newborn babies, which is what managing a real estate portfolio is like. It was their best option to liquidate their parent’s holdings, especially at this stage of the market.

Awhile ago in a real estate development class, the teacher showed how Macklowe financed the purchase of the GM building. All I can say is that the New York Times article barely scratches the surface of how complicated the financing was.

Will Macklowe be able to pull a hat trick? I have no idea. Obviously with the credit market getting beaten down, it appears that Macklowe’s fundage options are limited. However, this situation reminds me of what happened to Rupert Murdoch did back when he started his American TV Empire. Murdoch had basically leverage himself into a corner, in fact when the payments were due, he showed up to his bankers with news that he had no money and worse he needed more funds in order to keep the business running.

This was a very dangerous time for Murdoch because the bankers could have exercised the option to liquidate everything. In fact there was one banker that was on the edge of pulling down the whole house of cards. However Murdoch was able to persuade them to stick around. From what I also understand what motivated the bankers to cut Murdoch slack was the realization that they were already so deep in the hole with Newscorp they wouldn’t even break even by liquidating now. Maybe this will occur with Macklowe?